ONPOINT / A legal update from Dechert

May 2017

The U.S. Court of Appeals for the Ninth Circuit on May 5, 2017 upheld the 2014 convictions of a California businessman, Walter Liew (“Liew”), and his company USA Performance Technology, Inc. (“USAPTI”), for various violations of the Economic Espionage Act of 1996 (“EEA”) relating to Liew’s and USAPTI’s theft of trade secrets from E.I. du Pont de Nemours & Company (“DuPont”) and the sale of the trade secrets to state-owned companies in the People’s Republic of China (“PRC”).1

In so doing, Ninth Circuit panel affirmed the first federal jury conviction for charges arising under the EEA and potentially catalyzed more aggressive economic espionage and trade secret enforcement.

The Trial of Liew and USAPTI2

Liew and USAPTI’s 2014 trial took place in the U.S. District Court for the Northern District of California. Federal prosecutors presented evidence that the PRC government decided in the 1990s to develop its production capabilities of chloride-route titanium dioxide (“TiO2”)—“a commercially valuable white pigment” with various uses, including coloring paint, plastics, and Oreo cookies—to replace the less efficient existing sulfate-route TiO2 production process.3 PRC representatives shared these plans with Liew. Liew then assembled a team of employees at USAPTI who formerly worked at DuPont, which had previously developed sophisticated chloride-route TiO2 technology.4 Prosecutors showed that Liew and USAPTI contracted with state-owned entities of the PRC to develop chloride-route TiO2 projects that “relied on the transfer of illegally obtained DuPont technology.”5

In March 2014, a federal jury in San Francisco convicted Liew of eight counts of violating the EEA, including conspiracy to commit economic espionage, conspiracy to commit theft of trade secrets, attempted economic espionage, attempted theft of trade secrets, possession of trade secrets, and conveying trade secrets. The jury also convicted USAPTI of attempted economic espionage, attempted theft of trade secrets, possession of trade secrets, and conveying trade secrets.6 Liew was ultimately sentenced to 15 years in prison, to forfeit US$28 million in illegal profits, and to pay US$511,667.82 in restitution.7 USAPTI was sentenced to five years’ probation.8

The Ninth Circuit Rejected Defendants’ Arguments for a Narrow Definition of “Trade Secret”

The EEA allows the U.S. government to criminally prosecute individuals or organizations (1) who steal, or without authorization of the owner, obtain, destroy or convey information; (2) who knew the information was proprietary; (3) when the information was in fact a trade secret; and (4) who knew the offense would benefit or was intended to benefit a foreign government, foreign instrumentality, or foreign agents.9

Liew and USAPTI raised several issues on appeal, including challenging (1) the validity of the trial court’s jury instructions regarding the definition of “trade secret” under the EEA, and (2) whether the government presented sufficient evidence regarding the trade secret counts.10

First, defendants objected to the trial court’s refusal to give the following three jury instructions regarding defendants’ interpretation of “trade secrets” under the EEA:

“(1) a public disclosure instruction stating that ‘[i]nformation is known to the public when it is published in [a] patent, textbook, periodical, or other publicly available source’ and is ‘readily ascertainable if the information could be easily calculated or derived’; (2) a reverse engineering instruction providing that it does not constitute trade secret misappropriation to develop a process independently or ‘by working backwards from publicly available materials’; and (3) a general knowledge instruction providing that employees may ‘change employers or start their own companies relying on the general knowledge, skills, and experience obtained’ through previous employment.”11

The Ninth Circuit held that the district court rightly rejected these proposed instructions. With regard to the proposed “public disclosure instruction,” the Ninth Circuit found that, while “legally correct,” the defendants’ proposed instruction was “superfluous.”12 The parties did not dispute, the panel concluded, that “disclosure in patents and textbooks would destroy trade secret protection.” Rather, the parties disputed whether this “publicly available” material was in fact the same material DuPont claimed as trade secrets, and whether a person could engineer a TiO2 chloride-route plant using “publicly available” information. As such, a public disclosure instruction was unnecessary. The Ninth Circuit also rejected defendants’ arguments relating to the reverse engineering and general knowledge instructions. The Court found these proposed instructions were unnecessary because the given instructions “told the jury that individuals can independently develop technology through proper means and that [an employee] is free to leave an employer and use non-trade secret information and skills gained through that employment.”13

Second, defendants argued that the government presented insufficient evidence on the substantive trade secret counts—namely, that the government should have been required to prove that “no disclosures of DuPont’s TiO2 technology occurred.”14 The Ninth Circuit disagreed, finding that the government needed only to establish that DuPont took “reasonable measures” to guard its TiO2 technology. Furthermore, the Ninth Circuit added that, even accepting that some information relating to the TiO2 technology was publicly available, “the minute details and data” of the technology were not “readily ascertainable by or generally known to the public” and thus constituted a “trade secret” under the EEA.15

Economic Espionage/Trade Secret Enforcement May Increase in the Trump Administration

It remains to be seen how shifting political winds at home will shape enforcement efforts in the years to come. Early signs point to the Trump administration continuing aggressive global regulatory enforcement efforts, particularly when such efforts dovetail with its stated priorities of “protecting American national security and protecting American workers.” The EEA is an example of where the Trump administration’s policies and priorities may potentially lead to increased global enforcement activity. Effective use of the EEA could advance the new administration’s “America First” policy, which was initially embodied in a campaign pledge to use “every lawful presidential power to remedy trade disputes” including “[the] theft of American trade secrets . . . .”17 Such an approach would also dovetail with prior work by Attorney General Jeff Sessions, who as a Senator co-sponsored the Defend Trade Secrets Act, which created a corollary federal civil remedy for trade secrets theft, and amended the definition of “trade secret” under the EEA.

1)United States v. Liew, No. 14-10367, 2017 WL 1753269 (9th Cir. May 5, 2017). The Ninth Circuit affirmed in part, reversed and vacated in part, and remanded the case for resentencing and in camera review of potential Brady material. The Ninth Circuit panel reversed defendants’ convictions for conspiracy to obstruct justice and Liew’s conviction for witness tampering, and held that the district court should have required the prosecution to disclose the FBI’s interviews with a dead co-conspirator, where the co-conspirator’s attorney submitted a declaration suggesting that the FBI form 302 report summarizing the interviews (the “302 report”) contained Brady/Giglio material.

9) An individual who is guilty of violating the EEA is subject to a fine of up to US$5 million and/or imprisonment for up to 15 years. 18 U.S.C. § 1831. Similarly, an organization that violates the EEA may be fined up to US$10 million or three times the value of the stolen trade secret to that organization, including “expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.” Id.

10) Defendants also appealed their convictions for conspiracy to tamper with witnesses and evidence, and Liew appealed from his conviction for witness tampering.

Dechert internationally is a combination of separate limited liability partnerships and other entities registered in different jurisdictions. Dechert has more than 900 qualified lawyers and 700 staff members in its offices in Belgium, China, France, Germany, Georgia, Hong Kong, Ireland, Kazakhstan, Luxembourg, Russia, Singapore, the United Arab Emirates, the UK and the US. Further details of these partnerships and entities can be found at dechert.com on our Legal Notices page.